If you don’t pay your federal taxes on time, the IRS starts charging interest the very first day your balance is unpaid. Unlike penalties, interest almost never gets waived. It compounds daily, which means it accrues on both the original tax owed and any previously accrued interest. The longer your balance sits, the faster it grows.
Key takeaways
- As of Q2 2026 (April 1 through June 30), the IRS underpayment rate for individuals is 6% per year, compounded daily, down from 7% in Q1.
- Interest starts accruing the day your payment is due and continues until the full balance is paid, even on a payment plan.
- The failure-to-pay penalty is 0.5% per month (up to 25% total). On an approved installment agreement, this drops to 0.25% per month.
- Interest is set by law and can only be abated in limited cases: an unreasonable error or delay caused by an IRS officer or employee in performing a ministerial or managerial act. Incorrect written advice from the IRS is grounds for abating penalties under IRC §6404(f), not interest.
- Paying down principal faster is the most direct way to reduce total interest cost.
IRS interest rates for 2026
IRS interest rates are set quarterly based on the federal short-term rate plus a statutory add-on. Revenue Ruling 2026-5 established the following rates for Q2 2026 (April 1 through June 30):
- Individual underpayments: 6%, compounded daily
- Individual overpayments (refunds): 6%, compounded daily
- Corporate underpayments: 6%
- Corporate overpayments: 5%
- Corporate overpayments exceeding $10,000: 3.5%
- Large corporate underpayments: 8%
For Q1 2026 (January through March), the individual underpayment rate was 7%. Rates can change every quarter. Check IRS quarterly interest rates for the most current figures before making financial decisions.
How the IRS calculates interest on unpaid taxes
Interest compounds daily. The IRS applies it to the original tax owed plus any previously accrued interest, so the effective annual rate is slightly higher than the stated percentage. At 6%, a $10,000 balance accrues roughly $1.64 in interest per day at the start of the repayment period. That number drops as you pay down principal.
Setting up a payment plan doesn’t stop interest. It keeps accruing on the remaining balance until the account is paid in full.
How to estimate your monthly payment with interest
This is an approximation. Your actual payment may differ based on specific penalties, fees, and daily compounding, but it gives you a working number.
Example: $10,000 balance, 60-month repayment, 6% annual rate
Step 1: Base monthly payment. Divide $10,000 by 60 months = $166.67.
Step 2: Estimate monthly interest. $10,000 × 0.06 = $600 annually ÷ 12 = $50 per month.
Step 3: Add them together. $166.67 + $50 = $216.67 estimated monthly payment.
Step 4: If a failure-to-pay penalty applies at 0.25% per month (the reduced rate on an approved installment agreement), add $10,000 × 0.0025 = $25 per month. Total: approximately $241.67.
Interest declines as you pay down the balance, so actual monthly totals will decrease over time.
IRS penalties on unpaid taxes
Interest and penalties are separate charges. Both accrue until the balance is paid.
The failure-to-pay penalty is 0.5% of the unpaid tax per month, up to a 25% maximum. If you have an approved installment agreement in good standing, this drops to 0.25% per month.
The failure-to-file penalty is 5% of unpaid taxes per month for each month your return is late, also capped at 25%. When both penalties apply in the same month, the IRS reduces the failure-to-file penalty by the amount of the failure-to-pay penalty to avoid double-charging.
If you have penalties from a specific hardship event, you may qualify for penalty abatement. Penalties can be reduced or removed under reasonable cause relief, First-Time Abatement, or when an IRS error caused the noncompliance. Interest on the underlying tax, however, is set by statute and can only be abated in narrow circumstances: an IRS processing error that caused unreasonable delay, or incorrect written advice given by the IRS that you relied on.
Can IRS interest ever be waived?
Rarely, and only under specific conditions. Under IRC §6404(e), interest abatement is available when an IRS officer or employee made a ministerial or managerial error that caused an unreasonable delay in your case. A separate provision, IRC §6404(f), allows abatement of penalties (not interest) when the IRS gave you incorrect written advice in response to a specific written request. Interest doesn’t get abated because you couldn’t afford to pay or because you disagree with the underlying tax.
How to reduce the total interest you pay
The most direct approach is paying down the principal faster. Every extra payment reduces the balance on which interest compounds daily. If you can make larger monthly payments or occasional lump-sum payments, total interest cost drops significantly over the life of the debt.
Setting up a payment plan also reduces the failure-to-pay penalty from 0.5% to 0.25% per month, which indirectly lowers total cost. If your situation qualifies for an Offer in Compromise, settling the debt for less than the full amount stops interest from accruing on the portion the IRS accepts.
Frequently Asked Questions
Interest starts accruing on the due date of the unpaid tax, typically April 15 for individual returns. It continues every single day until the full balance, including all accrued interest, is paid. There’s no pause for setting up a payment plan or requesting an extension. In most situations, filing an appeal also does not stop interest from running. The only way to stop interest is to pay the balance in full.
No. A tax extension gives you more time to file your return, not more time to pay. If you owe taxes and don’t pay by the original April 15 deadline, interest starts accruing on that date regardless of whether you filed an extension. This is one of the most common misunderstandings about extensions. To avoid interest, you need to estimate what you owe and pay it by April 15 even if your return isn’t ready.
Yes. Setting up a payment plan doesn’t stop interest from accruing. Interest continues on the unpaid balance at the current quarterly rate, 6% per year compounded daily as of Q2 2026, until the account is paid in full. The benefit of a payment plan is that it reduces the failure-to-pay penalty from 0.5% to 0.25% per month, which lowers total cost even though interest keeps running.
There’s no fixed monthly rate. IRS interest is set as an annual percentage compounded daily, so the monthly equivalent varies slightly. At the current Q2 2026 rate of 6% annually, a $10,000 balance accrues roughly $50 in interest in the first month. As you pay down the principal, the monthly interest amount decreases. The daily compounding means the effective annual rate is slightly higher than 6%.
If you overpay, the IRS owes you a refund plus interest on the overpayment. As of Q2 2026, the IRS pays 6% annual interest on overpayments to individual taxpayers, the same rate it charges on underpayments. The IRS only pays interest if it takes more than 45 days to issue the refund. For returns filed on time, that 45-day window starts from the return due date. For returns filed late, it starts from the date the return was actually filed. For most taxpayers who file on time and get a prompt refund, no interest is added.
There are many tools available online; you can use one of them.